Presentation to the Distribution Charging Methodologies Forum - - PowerPoint PPT Presentation

LLP Economic regulation Competition law Data analysis

Presentation to the Distribution Charging Methodologies Forum Franck Latrémolière

19 June 2008

1

What is exploitative abuse?

• Infringement with direct impact on a customer

– Not necessarily anti-competitive conduct – Distinct from exclusionary or discriminatory abuse

• United Brands (ECJ) / Napp (CAT) formulation

– “has made use of the opportunities arising out of its dominant position in such a way as to reap trading benefits which it would not have reaped if there had been normal and sufficiently effective competition”

• Identify market features to show difference from

normal and sufficiently effective competition

2

Does the price control not address these problems?

• The price control prevents overall exploitation
• But competition law protects each customer

– cf. English Court of Appeal in Napp: “the Tribunal convincingly demonstrated that the [Pharmaceutical Price Regulation Scheme] outcome, precisely because of its "portfolio" base, is irrelevant in the case of over-pricing of any particular product”

• No “State action” defence

– Ofgem does not direct use of any charging method

3

LRMIC example

• Load: 49 MVA. Capacity: 50 MVA. Cost: £5m.
• Growth 0.25%: 8 years to go. PV of cost: £3m.
• Additional 1 MVA adds £2m of PV (£5m – £3m)
• Annualise over 40 years: £150/kVA.
• Would imply charges of more than £5m a year.
• Might a large customer on this circuit complain

that this seems higher than a reasonable return?

4

Why is stand-alone rebuilding cost relevant?

• Find market features which restrict competition

– Planning, wayleaves, special rights in licence, etc.

• Imagine that these market features do not apply

– i.e. anyone can build distribution network elements

• Identify evidence of exploitative abuse

– i.e. if the market features lead to higher prices – The relevant benchmark is a price that gives a reasonable return on the stand-alone cost of rebuilding the network elements

5

Might there be an

• bjective justification?
• Even if the price is higher than in the hypothetical

more competitive market, it might be justified

– Investors are entitled to a reasonable return – DNOs are entitled to apply incentives on customers

• Justification is subject to proportionality

– Only to the extent necessary to achieve objectives – For example, price control revenue target (fair return) does not justify large locational differences

• For LRMIC: look for necessary incentive effect

6

LRMIC as justification?

• Marginal change in present value amount reflects

expenditure caused by sustained change in load

– Sensible basis for an incentive

• LRMIC examples spread the present value of all

investment on increment between now and 2048

– Only load at the time of reinforcement affects cost? – No good reason found — this is fatal to justification

• Reasonable incentive could not have been

greater than return on stand-alone rebuilding cost

7

Can FCP lead to similar issues?

• FCP uses foreseeable expansion expenditure,

spread over total load, over fixed 10-year window

– Past load is deemed to have paid its fair share – Time profile seems arbitrary — but is it reasonable?

• Excessive geographical differentials very unlikely
• Theoretical risks are in the opposite direction

– Could connected customers close to GSP complain? – Is there dominance / relevant market features? – Possible justifications, e.g. smooth transition?